International ETFs: Investing Beyond Your Home Market
40% of global stocks are outside the U.S. Here is why international ETFs matter and how taxes and currency affect your returns.
Don't have time? Here's what you need to know:
- 1International stocks represent 40% of global markets — providing diversification against U.S.-specific risk
- 2From 2000-2009, international beat U.S. by 39 percentage points — market leadership rotates unpredictably
- 3Hold VXUS in taxable accounts to claim the foreign tax credit; Roth IRAs lose this benefit
- 420-30% international allocation is a reasonable default for most U.S. investors
Why Your Portfolio Needs Non-U.S. Stocks
The U.S. represents about 60% of global stock market capitalization. The other 40% — Europe, Japan, UK, China, India, Canada, Australia, and 30+ other countries — offers diversification against U.S.-specific risks. From 2000-2009, international stocks returned +30% while U.S. stocks returned -9%. From 2010-2023, the roles reversed. Nobody knows which decade comes next.
International ETFs (VXUS, VEA, VWO) give you this geographic diversification in one purchase. VXUS alone holds 7,000+ stocks across 40+ countries for 0.07% per year.
The Complications: Taxes and Currency
Foreign withholding tax: many countries tax dividends before they reach your ETF. The U.S.-Ireland tax treaty reduces this to 15% for Irish-domiciled funds (relevant for non-U.S. investors). U.S. investors holding VXUS in a taxable account can claim the foreign tax credit on their U.S. tax return — partially recovering the withheld amount.
Currency risk: VXUS is unhedged. When the U.S. dollar strengthens, international returns look worse in dollar terms (and vice versa). Over 20+ years, currency effects tend to average out. For long-term investors, unhedged is the standard recommendation.
Tip: Hold VXUS in a taxable account (not Roth IRA) to claim the foreign tax credit on your U.S. tax return. In a Roth IRA, the foreign tax credit is lost — you cannot recover withholding taxes in a tax-free account.
How Much International to Hold
Financial advisors typically recommend 20-40% of your stock allocation in international. Vanguard's target-date funds use about 40% international. Jack Bogle recommended 0% (he believed U.S. multinationals provide sufficient global exposure). The answer is somewhere between — 20-30% is a reasonable default for most U.S. investors.
The exact percentage matters less than consistency. Whether you choose 20% or 40% international, the long-term results are similar. What matters is having some international exposure to protect against a prolonged period of U.S. underperformance.
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Frequently Asked Questions
VXUS or VEA + VWO?
VXUS holds both developed and emerging markets in one fund. VEA (developed only) + VWO (emerging only) gives you control over the split. For simplicity, VXUS. For custom allocation, VEA + VWO. Performance is nearly identical.
Why have international stocks underperformed the U.S.?
U.S. tech dominance, a strong dollar, and weak Chinese economic growth have favored U.S. stocks since 2010. These factors can reverse — international stocks are significantly cheaper on a valuation basis, which historically suggests better future returns.
Do I need international bonds too?
Optional. BNDX (total international bond, 0.07%) adds geographic diversification to your bond portfolio. Many financial advisors consider it unnecessary for U.S.-based investors since U.S. bonds provide sufficient stability and the currency risk adds complexity.
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Alex Harrington
CFA Level II Candidate, Finance & Economics
Alex Harrington is an independent ETF researcher and personal finance writer with over 8 years of experience analyzing exchange-traded funds. A CFA Level II candidate with a background in economics, Alex has reviewed 800+ ETFs and helped thousands of beginners build their first investment portfolios through clear, jargon-free education.
This content is for educational purposes only and does not constitute financial advice. Past performance does not guarantee future results. Consult a licensed financial advisor before making investment decisions.